The Argentina sovereign debt mess is still not resolved, but already folks are debating its larger consequences for international economic governance. In particular, there continue to be calls for a new international sovereign debt mechanism to prevent another Argentina-style U.S. litigation. But although I agree that there are decent arguments for some sort of international treaty-based mechanism for sovereign debt restructuring, I disagree that the Argentina-debt litigation in the U.S. is one of them. You can read a fuller (much longer) version of this argument in the just posted issue of the University of Pennsylvania Journal of International Law.

May 28th, 2015 - 12:46 AM EDT | Comments Off on Don’t Cry for Sovereign Debtors: Why Argentina’s Defeat in U.S. Courts Does Not Justify a Sovereign Debt Treatyhttp://opiniojuris.org/2015/05/28/dont-cry-for-sovereign-debtors-why-argentinas-defeat-in-u-s-courts-does-not-justify-a-sovereign-debt-treaty/ |

I am fascinated by the ongoing Argentina debt litigation saga (and not just because it looks more and more like a train wreck), but because it is forcing U.S. courts to burrow into even fuzzier nooks and crannies of the Foreign Sovereign Immunities Act to figure out what exactly US litigants can do when suing an intransigent foreign sovereign like Argentina. I promised I would revisit the question of whether the U.S. judge’s contempt order against Argentina on Monday was legal, and here is my further (although still somewhat brief) analysis.

1) It is legal and consistent with U.S. domestic law for a U.S. court to issue contempt sanctions against a foreign sovereign.

The most recent authority for this proposition is the quite recent 2011 opinion from the U.S. Court of Appeals for the D.C. Circuit, F.G. Hemisphere Associates v. Congo. In that case, the D.C. Circuit rejected the argument by Congo (and the U.S. Government) that contempt sanctions due to Congo’s refusal to comply with discovery orders would violate the FSIA. Following the U.S. Court of Appeals for the Seventh Circuit in Autotech Techs. v. Integral Research & Dev., 499 F.3d 737, 744 (7th Cir.2007), the Court held that nothing in the text or the legislative history of the FSIA suggested that there was any limitation on the inherent judicial power to issue contempt sanctions. It also rejected contrary precedent from the U.S. Court of Appeals from the Fifth Circuit in Af-Cap, Inc. v. Republic of Congo, 462 F.3d 417 (5th Cir. 2006).

I think the DC and Seventh Circuits are right that nothing in the text or the legislative history of the FSIA bars a judicial contempt order against a sovereign.

2. There is some authority for the proposition that judicial contempt orders against foreign sovereigns are not accepted under international law, but there is reason to question whether there is international consensus supporting this authority.

Article 24
Privileges and immunities during court proceedings
1. Any failure or refusal by a State to comply with an order of a court of
another State enjoining it to perform or refrain from performing a specific act
or to produce any document or disclose any other information for the purposes
of a proceeding shall entail no consequences other than those which may result
from such conduct in relation to the merits of the case. In particular, no fine or
penalty shall be imposed on the State by reason of such failure or refusal.

I think that the language of this provision seems to pretty clearly cover the situation in the Argentina debt case. But I am less sure that Argentina is correct to call Article 24 of the Convention a rule of customary international law.

U.S. briefs citing Article 24 have been careful to call this rule an “international norm or practice” rather than a rule of international law. There are good reasons to be circumspect on this point. After all, the Convention on Jurisdictional Immunities has NOT come into force, and has NOT even been signed by either Argentina or the United States, and has only been ratified by 14 other countries. Moreover, the particular rule in Article 24 banning all court contempt-like orders is much broader than the domestic laws of states like the U.S. (see above) and even those agreed to by European states in the European Convention on State Immunity. Article 17 of the European Convention is focused only on contempt orders for failure to produce documents, not all contempt orders for any act by the foreign sovereign.

So in conclusion, I am very confident that U.S. domestic law does NOT preclude a contempt order of any kind against a foreign sovereign. I am somewhat confident that there is no clear consensus under international law that all contempt orders (even those unrelated to discovery) are prohibited, although I do think Argentina has a stronger case on this front. However, in U.S. law, a rule of customary international law cannot override a federal statute, especially when the international acceptance of that rule remains uncertain.

As a practical matter, I do wonder if this whole contempt kerfuffle is just symbolic. The contempt order adds to Argentina’s obligations to pay, but it doesn’t really make it any easier for the creditors to collect since Argentina’s non-commercial assets in the U.S. remains immune from collection. While Argentina’s government may be outraged, this contempt order doesn’t really change the overall dynamic of this case, which remains a standoff that neither side is winning.

In the latest round in the never-ending battle between Argentina and its holdout bondholders, a U.S. court has found Argentina to be in “contempt” for trying to circumvent that US court’s orders. Argentina has been outraged by such an order, arguing that a state cannot be held in “contempt” because it is an affront to its sovereign dignity (with Argentina’s president denouncing the U.S. judge as “senile“). Indeed, the Argentine government on Monday sent a very interesting letter to U.S. Secretary of State John Kerry setting out why it believes it cannot be subject to a “contempt” order in a domestic U.S. court.

The Argentine Republic notes that it is completely absurd for plaintiffs to argue that a local judge can hold a foreign State “in contempt”. This position can only arise from ignorance or a distorted view of the fundamental rules of international law currently in force and the peaceful coexistence of global order.

The principles on which international coexistence rests are reflected in the Charter of the United Nations. One of these principles refers to sovereign equality of all States and is expressly embodied in Article 2(1) of that Charter. This is a fundamental principle when it comes to determining what a State can or cannot do in relation to other States.

When any branch of government of a State denies “equal” status to another State, it not only manifestly violates international law but it also risks setting a precedent for the commission of similar violations of international law to its own detriment.

I think that Argentina’s argument that contempt orders and other judicial sanctions against it are violations of international law (even thought it has consented to that domestic jurisdiction) can draw some support from the statements of the U.S. government itself (which is quoted extensively in the letter). The problem for Argentina is that the U.S. judicial system has not agreed with the U.S. government’s views on many of these questions. So US law is no help to Argentina here (for the most part). And the U.S. government has almost no legal mechanisms to change the district court’s actions here, so the letter is largely for public consumption.

The harder question is whether (as Argentina argues) there is a generally accepted rule of international law that a court cannot hold a sovereign in contempt where that sovereign has consented to the jurisdiction of that court. This is a tricky question and one worth thinking about further. I hope to post on that when I have had more time to digest it.

Reasonable people can disagree about the legal merits of U.S. court judgments against Argentina requiring it to pay holdout creditor hedge funds. But I can’t say the same about Argentina’s recently announced claim against the United States at the International Court of Justice. Based on Argentina’s own description of its legal arguments, I stand by my earlier assessment: Argentina’s international law claim against the United States is frivolous and would have almost no chance of succeeding, even if Argentina somehow convinced the U.S. to accept ICJ jurisdiction.

Although Argentina’s complaint to the ICJ has not been publicly released, it is likely that Argentina will accuse the U.S. of allowing its court system to violate Argentina’s immunity rights as a nation-state and to interfere in Argentina’s ability to pay its non-holdout creditors through U.S. banks.

What makes this claim ridiculous is that Argentina chose to grant the U.S. judicial system a wide-ranging jurisdiction over bonds it sold to private investors. When issuing those bonds, Argentina promised that it had “irrevocably agreed not to claim and has irrevocably waived” immunity “to the fullest extent permitted by the laws of the U.S. and New York. Argentina also agreed to allow “any of its revenues, assets or properties” to be subject to judicial execution and enforcement to whatever degree permitted by U.S. law.

In a new claim in the long-running battle between Argentina and holders of its defaulted bonds (see here), the question is whether a U.S. court can order Argentina not to pay some bondholders unless it also pays others. Again, Argentina says the Foreign Sovereign Immunities Act (FSIA) protects it, and again it tries to make the Act’s text say something it does not.

To recap, a decade ago Argentina stopped making payments on some of its bonds, and the private bondholders (including NML Capital) sued Argentina in federal court in New York (as the FSIA and the contracts governing the bonds allowed them to do). Argentina refused to pay the resulting judgments against it, so the bondholders are seeking enforcement. One approach is to seek discovery of Argentina’s worldwide assets; whether a U.S. court can make such an order is the subject of the first Republic of Argentina v. NML Capital case, argued to the U.S. Supreme Court in April.

The bondholders’ second strategy involves a clause in the bond contracts known as the equal treatment or pari passu clause. To oversimplify, after Argentina initially failed to make payments on the bonds, it persuaded many of the bondholders to accept new bonds, with substantially reduced payments (but some hope of salvaging part of their investment). NML Capital (and a few others) refused to take the deal, and sued for full payment of the original bonds instead. Argentina now wants to pay the new bondholders (that is, those who agreed to the refinancing) while refusing to pay the holders of the old bonds.

But that sort of discrimination among bondholders, the U.S. court held, violates the “equal treatment” clause in the original bond contracts: the clause says that the old bonds have to be treated equally to any new bonds, and clearly they aren’t. Argentina had already said it wouldn’t obey a court order to pay on the old bonds. So the holders of the old bonds asked the court for an injunction barring payment on the new bonds unless the old bonds receive equal treatment. The district court granted the order and the Second Circuit affirmed.

Now Argentina is bringing this claim to the U.S. Supreme Court on petition for certiorari (scheduled to be considered at the June 12 conference). As with the case involving the discovery order, its supposed shield is the FSIA. But again, Argentina is trying to make the FSIA do something it does not. Argentina concedes that the FSIA allows the bondholders’ suit: Argentina waived its sovereign immunity in the bond contracts, and the FSIA allows suit where immunity is waived (Section 1605(a)(1)). The FSIA further says (Section 1606) that non-immune sovereigns are (subject to specific exceptions) liable to the same extent as private litigants.

The only plausible exception (and the only one Argentina argues) (more…)

The Supreme Court considered on Monday whether a U.S. court can order disclosure of Argentina’s worldwide assets. Perhaps surprisingly, the answer should be yes.

The underlying facts of Republic of Argentina v. NML Capital are straightforward. Argentina issued bonds, which were bought by private investors including NML, and then defaulted. In the bond contracts, Argentina waived its sovereign immunity and consented to jurisdiction in New York. After the default, NML sued Argentina in New York, as the bond contracts contemplated.

The Foreign Sovereign Immunities Act (FSIA) says that foreign governments can be sued in the U.S. only in circumstances listed in the statute. One of those circumstances is when the sovereign waives its immunity by contract. So there’s no question that NML could sue Argentina.

The question, rather, is what NML could do once it won (as it did) and Argentina still refused to pay (as it did). The FSIA also says that creditors cannot execute on (seize) foreign sovereign assets in the United States to satisfy a judgment unless the assets are being used in a commercial capacity. NML asked the trial court to order two New York banks that handle Argentina’s finances to disclose what they knew about Argentina’s assets (commercial or otherwise). Argentina, supported by the U.S. executive branch, claims this violates the “spirit” of the FSIA.

It doesn’t. The FSIA (Section 1609) specifically protects non-commercial sovereign assets only against “arrest attachment and execution.” It does not say assets are immune from disclosure. There’s a good reason it doesn’t: to figure out which assets are used for commercial purposes, and thus subject to execution, first one needs to know what assets exist. It obviously won’t do to have Argentina – or Argentina’s bankers – make an unreviewable judgment as to which assets are commercial and not disclose the others. And in other respects, the FSIA (Section 1606) says, a non-immune sovereign shall (subject to exceptions not relevant here) “be liable in the same manner and to the same extent as a private individual under like circumstances.”

Thus, as a number of Justices appeared to recognize at oral argument, the key law isn’t the FSIA but Rule 69 of the Federal Rules of Civil Procedure, which govern ordinary litigation in federal court. Rule 69 allows a federal court to order discovery in support of execution, which is what the trial judge did here. The rule doesn’t have any limits on the type of property or the geographic limits – rather, its leaves the matter to the discretion of the court. In private litigation, courts acting under Rule 69 routinely require disclosure of assets outside the jurisdiction or arguably not subject to execution.

At oral argument, some Justices seemed troubled that Argentina (or other sovereigns) might have to disclose the location of sensitive diplomatic or military assets. It’s a fair concern, but no reason to make the FSIA say something it clearly does not. First, district courts are adept at balancing all sorts of competing interests that arise in discovery disputes and in allowing only discovery appropriate under the circumstances; Rule 69 gives them plenty of discretion to do so. Second, the only disclosures the trial court required here are of financial transactions (and the order isn’t even directed to Argentina, but rather to third-party banks); no one is asking Argentina to disclose the location of, for example, specific military assets. And third, presumably disclosures could be made confidentially to the court as needed for particular assets.

Moreover, NML claims that Argentina has shown its willingness to abuse institutions like the Bank of International Settlements to shield its assets from creditor judgments. That’s what NML’s attorney Ted Olson was speaking of when he said at one point during Monday’s proceeding that Argentina could slap an air-force label on a commercial airplane in order to shield that asset. He wasn’t talking about NML attaching non-executable assets, he was simply pointing out the danger of creating loopholes in the discovery process that would allow Argentina to deny discovery on assets that creditors would be entitled to.

This goes to the heart of why NML has a need for the disclosures. Argentina has openly refused to pay the judgment against it. NML is entitled to execute on Argentina’s commercial assets in the United States, and may be able to execute on some non-commercial assets elsewhere (in jurisdictions that lack the U.S.’s commercial limit). To do so, it needs to know what assets exist, and it cannot rely on Argentina’s self-reporting of which assets are commercial.

Ultimately the rule of law, especially in international transactions, depends on courts holding parties to their promises and providing a way to enforce judgments. If Argentina didn’t want to be subject to U.S. court enforcement, then it should not have waived its immunity and consented to jurisdiction (but, of course, then it would have had much more difficulty selling its bonds). Argentina could still avoid unwanted disclosures by doing what it is supposed to do anyway: pay the entirely valid judgment against it.

The rule of law also depends on courts reading statutes to mean what they say, and not more than they say. Argentina is asking the Court to find an immunity in the FSIA that simply isn’t there. Argentina’s protection instead comes from Rule 69 – but it’s a protection that rests largely with the lower court, which knows the case better and is better able to balance competing equities on an on-going basis than the Supreme Court. It may be helpful for the Court to ask district courts to use careful discretion in managing disclosure requests directed at a foreign sovereign under Rule 69. For instance, the Justices could recommend that district court judges ask the sovereign to create a privilege log (or a similar mechanism) for those assets, such as military property, that are extra-sensitive. This would balance the interests of the sovereign and the creditors. But creating a blanket protection against disclosure of assets under the FSIA is contrary to both the statute and the needs of the international rule of law.

I have been remiss in not pointing interested readers to Anna Gelpern’s terrific posts on the ongoing NML v. Argentina sovereign debt litigation that is going on here in New York. I want to highlight in particular her incredibly useful and interesting account of the scene last week when the U.S. Court of Appeals for the Second Circuit heard arguments challenging a lower federal court’s order that Argentina has an obligation to pay its holdout creditors at the same time it pays its restructured creditors via a “pari passu” clause in its sovereign debt contracts. The bottom line: Gelpern seems to predict the US court will order Argentina to pay its holdout creditors, but probably not the full amount they are seeking. And she doubts Argentina will pay up anyway.

Indeed, from an international law perspective, this last point is the most fascinating part of the argument. The lawyer for Argentina made clear to the court that Argentina would not comply with the court’s order to pay the holdouts. Period. Here is Gelpern’s description:

Big Bonus Feature: Sovereign Prerogative. One of the bigger bombshells of the day came from Argentina in the form of the statement that it would default on everyone unless the Court adopted something like its payment formula. The fact that the statement was made with the Vice President and the Economy Minister sitting in the room made it feel like an even bigger deal. Jonathan Blackman’s contention was that sovereigns do not and cannot — and Argentina will not — “voluntarily obey” foreign judgments against their own domestic law and public policy. Argentina’s submission to U.S. jurisdiction was made subject to the understanding that under FSIA, some judgments could go unenforced, and them’s the ropes. Since NML was effectively (though not technically) trying to enforce a judgment, it was out of luck. Blackman’s hypothetical of an Iranian court order against the U.S. government seemed like a high-risk move under the circumstances. The threat of default prompted Ted Olson for NML to say that Argentina promised this extreme course “to force this Court to back down … The Court cannot give into that!” ….

It is (to say the least) extraordinary when a party to a dispute makes the argument that it will simply not comply with an order of the court that has jurisdiction over it. As a matter of litigation strategy, it is simply bad tactics since it usually enrages the judges.

From an international law perspective, it should be clear that Argentina’s action, although defensible, is not in any way justified by international law, although it is not prohibited by international law either. What strikes me about the statement is that it is really quite “sovereigntist” and based on a realist, hard-nosed approach to international law and contracts.

As I discussed in an earlier post, Argentina has waived almost all of its sovereign immunity defenses when it issued the bonds, and agreed to New York law:

To the extent the Republic [of Argentina] or any of its revenues, assets or properties shall be entitled … to any immunity from suit, … from attachment prior to judgment, … from execution of a judgment or from any other legal or judicial process or remedy, … the Republic has irrevocably agreed not to claim and has irrevocably waived such immunity to the fullest extent permitted by the laws of such jurisdiction…

So Argentina agreed to give up its immunity defenses under international law and submit to the US courts.

If I understand Argentina, it is now saying to the US court: You try to enforce this order on us, and we walk away. We won’t pay anyone, including the other restructured creditors. Your only remedy is to try to attach our non-commercial assets, which you can’t do under US law. Ironically, if US law permitted such attachments, Argentina’s waiver would plainly subject it to such attachments.

I think this strategy could work for Argentina, although they deserve plenty of additional reputational damage for this move. They sold bonds in the US, waived their international law defenses, and raised billions of dollars. Arguably, they also agreed by contract to pay all creditors via its pari passu clause.

Now they are taking advantage of a quirk in US law to escape their obligations. They are even playing the “sovereignty” card, by pointing to their own domestic law as a basis for their refusal to pay. And respect for their sovereignty is probably why they get away with this move, as slimy as it seems to do so in this case. Maybe that’s the right result, but I wouldn’t want to celebrate it in any way.

March 5th, 2013 - 12:23 PM EDT | Comments Off on Argentina to U.S. Court: We Won’t Obey Your Order Because We Are a Sovereign. So There!http://opiniojuris.org/2013/03/05/argentina-to-u-s-court-we-wont-obey-your-order-because-we-are-a-sovereign-so-there/ |

[Craig H. Allen is the Judson Falknor Professor of Law at the University of Washington in Seattle.]

On December 15, 2012, one phase of the dispute between the Argentine Republic and the Republic of Ghana over the “seizure” of the Argentine frigate ARA Libertad while in a Ghanaian port came to an end, when the International Tribunal for the Law of the Sea (ITLOS) in Hamburg, Germany ordered Ghana to “forthwith and unconditionally release the frigate ARA Libertad” and to “ensure that the frigate ARA Libertad, its Commander and crew are able to leave the port of Tema and the maritime areas under the jurisdiction of Ghana, and … that the frigate ARA Libertad is resupplied to that end.” (See Order of 15 December 2012).

The order came just one month after Argentina filed its application for provisional measures with the ITLOS. The tribunal’s decision—which should receive a warm welcome in the Pentagon—sends a clear message on the principle of sovereign immunity of warships and the readiness of ITLOS to enforce that immunity even when the warship is in the port or internal waters of another state—at least if the involved states are party to the 1982 LOS Convention.

The dispute between the two states has its roots in Argentina’s 2001 default on roughly $100 billion in sovereign debt, reportedly the largest sovereign default in history. NML Capital Investments, which owns some $1billion in Argentina’s sovereign debt, obtained judgment in a New York federal district court for $284 million in 2006. The U.K. Supreme Court later upheld NML’s right to execute its judgment against Argentina’s assets in the U.K. (NML Capital Ltd v Republic of Argentina, [2010] EWCA Civ. 41, aff’d, [2011] UKSC 33), a decision extensively relied on by agents for Ghana during oral argument at the ITLOS.

Argentina is, to put it bluntly, one of the world’s greatest sovereign deadbeats, defaulting on its sovereign bonds more than once as well as bearing the distinction of being the world’s number one respondent in ICSID arbitration claims (or at least close to number one). Last week, the ongoing struggle between foreign creditors and Argentina found a new flashpoint as investors brought an action in Ghana to attach ARA Libertad, an Argentina government naval training ship that was on a goodwill tour of West Africa.

Argentina had defaulted on its sovereign bonds in 2002 and various investors who did not accept Argentina’s settlement of those debts (which involved a 70% “haircut”) have been seeking to collect on those debts ever since, especially in litigation occurring in the U.S. and the U.K. So far, however, investors have failed to collect much money, even though a U.S. court has granted summary judgment holding Argentina liable for more than $280 million (with lots of interest accruing).

The Ghana litigation is the latest round in this ongoing struggle to collect on this judgment. The commercial court in Accra has refused Argentina’s effort to lift an injunction preventing ARA Libertad from leaving Ghana, holding that Argentina’s bonds waived applicable sovereign immunity defenses. Indeed, most courts seem to have agreed that Argentina has indeed waived its immunity defenses. Here is an excerpt of their waiver, as described in a recent U.S. Court of Appeals for the Second Circuit decision: (E.M. Ltd. V. Republic of Argentina (2d Cir. Aug. 20, 2012)

To the extent the Republic [of Argentina] or any of its revenues, assets or properties shall be entitled … to any immunity from suit, … from attachment prior to judgment, … from execution of a judgment or from any other legal or judicial process or remedy, … the Republic has irrevocably agreed not to claim and has irrevocably waived such immunity to the fullest extent permitted by the laws of such jurisdiction…

Of course, this waiver does not necessarily mean that all of Argentina’s assets can be seized or attached. In U.S. litigation, courts have held that this waiver allows U.S. courts to attach Argentina state assets that are used for a commercial activity. (NML Capital v. Argentina, 680 F.3d 254 (2d Cir. 2012)). If such an approach is followed in Ghana, I am not sure whether the foreign investors would be able to prevail since they would have to prove that the ARA Libertad is being used for a commercial as opposed to a naval activity.

On the other hand, Ghana law could very well be more favorable to the creditors than U.S. law. It certainly sounds like that is the case given this report of the arguments in the Ghana court. Perhaps sensing it has a losing legal argument, Argentina has begun a full-court diplomatic press on Ghana, even enlisting Chile to help out.

If Ghanian law allows a waiver of attachment to extend to all sovereign property, then it seems only fair that this case should be allowed to proceed regardless of what Argentine or Chilean diplomats say. I realize that the foreign creditors here are “vulture” investors who purchased the bonds from the original bondholders at a steep discount, but I don’t think that excuses Argentina from its undoubted legal liability. Even if the ARA Libertad is not properly the subject of attachment, I can’t understand why folks continue to excuse Argentina’s deadbeat behavior. Argentina plainly has the money to pay the judgment (the just expropriated their largest oil company, after all), and it is obligated to do so as a result of its own commitments. So why cry for Argentina?

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